Canada: Further Changes To The Tax Proposals

On October 18, 2017, Finance Minister, Bill Morneau, provided
some clarity to the proposed changes to the rules concerning
passive income earned in a corporation. The Minister expressed that
these new developments were the result of the feedback the
government received from Canadians to the originally proposed tax
changes released mid-July.

The Department of Finance estimates that there is currently
between $200 and $300 billion dollars in passive assets being held
in private corporations, which represent funds that have not been
reinvested in respective active businesses carried on by these
private corporations. Furthermore, it is estimated that these
assets are generating approximately $20 billion annually in passive
investment income. Morneau stated that the wealthiest benefit the
most from the current regime, namely that 80 per cent of these
passive investments are held in the top 2 per cent of private
corporations.

The clarifications announced include:

Ensuring that existing investments in
a corporation and any passive income earned from them in the future
will be protected from the new tax measures.

Providing a threshold for passive
investment income earned of $50,000 per year with respect to
prospective investments, with any amount in excess of the threshold
being taxed at a higher rate. The $50,000 is equivalent to a 5 per
cent rate of return on $1 million of investments.

Maintaining incentives so that
Canada's venture capital and angel investors can continue to
invest in innovation.

Similar to the announcement earlier this week, no draft
legislation or substantial details were released. The government
will release draft legislation for these measures as part of the
federal Budget 2018.

Although the announced clarifications are a marginal improvement
from the alternatives outlined in the July consultation paper in
connection with passive income earned in private corporations, it
will likely require that private corporations track and possibly
segregate their investments into separate pools or accounts,
leading to additional compliance and complexity.

We will keep you updated on any further details that may be
forthcoming.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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